Crop Insurance

One of the most common strategies used to reduce income variability associated with production risk is crop insurance. The two most common types are private crop hail and Multi-Peril Crop Insurance (MPCI). The first decision a nursery grower must make concerning crop insurance is whether enough financial reserves exist to cover a disastrous crop production or marketing year. If the answer is no, then crop insurance may be an option to consider in an overall risk management plan.

Management of production risk through the purchase of crop insurance transfers risk from the nursery business to the insurer in exchange for a price stated as an insurance premium. If a producer can insure some part of their expected production, that level of production may be contracted with a buyer for a greater certainty, creating a more predictable level of revenue.

Crop insurance is a risk management tool that not only protects against losses but also offers the opportunity for more consistent gains. When used with a sound marketing program, crop insurance can stabilize revenues and potentially increase average annual profits.

Nursery crop insurance provides many important benefits:

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  1. Ensures a reliable level of cash flow;
  2. Is an honorable and sometimes recommended loan collateral tool;
  3. Allows more flexibility in a producerís marketing plan;
  4. Adds confidence when following those planned strategies;
  5. Provides stability for long-term business plans and family security;
  6. USDA shares in the premium costs, and more (MPCI).
Some of the major sources of production risks include weather, pests and crop diseases. USDAís Risk Management Agency (RMA) is placing a special emphasis on strengthening the safety net for U.S. nursery growers. Together, RMA and private crop insurance companies have developed a set of insurance programs to help protect nursery business' risks at a reasonable cost.

Nursery growers should consult a private crop insurance agent to obtain specific information and details (e.g., practices, options, and appropriate deadlines) to help decide what insurance program may best fit the needs of their nursery business. A list of crop insurance agents is available at all local USDA Service Centers throughout the U.S. or at the website address: www.rma.usda.gov/tools/agents/.

The information in this section includes specific nursery crop insurance information to help nursery growers learn more about various methods to lower production risks and revenue (Adjusted Gross Revenue insurance program).

Multiple Peril Crop Insurance Protection Program
Multiple Peril Crop Insurance (MPCI) is often used by nursery growers to reduce production risk. MPCI is a broad-based crop insurance program regulated by the U.S. Department of Agriculture and subsidized by the Federal Crop Insurance Corporation (FCIC).

Insurance Policy Availability
Nursery crop insurance protection is available to all persons operating a wholesale nursery that produces and markets nursery plants grown in standard nursery containers or the field according to Federal Crop Insurance Corporation's (FCIC) insurance provisions.

A nursery is considered a business enterprise that has wholesale sales of nursery plants equal to or greater than 50% of the nursery's gross income. A nursery that receives more than 50% of its gross income from retail plant sales is not eligible for coverage under the Nursery Crop Insurance Provisions. The percentage of wholesale plant sales is determined by dividing the dollar amount of wholesale plant sales by the total dollar amount of combined retail and wholesale plant sales. Income from other operations including landscaping, chemical sales, other nursery related products, production of other crops or livestock or any other business enterprise not related to the nursery inventory are not to be included in this calculation.

Causes of Loss
The insurance provided is against damage resulting from an insurable cause of loss occurring during the insurance period, including: adverse weather conditions;

  • fire;
  • wildlife;
  • earthquake;
  • volcanic eruption;
  • failure of irrigation water supply;
  • delay in marketability of the plants, if such delay results in a reduction in the value of the plants, due to an insurable cause of loss.
Cause of Loss Limitations
Plant disease and insect damage are not covered unless the disease or insect infestation occurs and no effective control measure exists, or unless otherwise specified on the Special Provisions. If a pesticide or herbicide is not available for control of disease or insects, loss from disease or insects that are not controllable will be covered. Horticulturists, extension agents, or agronomists may be used as experts in determining appropriate control measures. Disease or insect damage resulting from conditions that reduce the effectiveness of control measures is not covered.

Insurable plants grown without required over-winterization cold protection are covered for all named perils except cold temperatures without the need for a special endorsement.

INSURANCE QUESTIONS TO CONSIDER FOR A NURSERY PRODUCER:

  1. How much coverage do I need for adequate cash flow?
  2. What are the major sources of crop weather risk in my area?
  3. How much coverage can I afford?
  4. Which crop insurance product will best complement my marketing plan?
  5. What are the implications of a crop loss on my ability to meet my debt obligations?
  6. What are the major sources of production risk?
  7. Who is a local crop insurance agent so I can obtain specific information (types and levels of coverage, premium costs)
  8. What is the minimum cash flow I will need?
  9. What collateral will I need for operating loans?
  10. What will I need to pay off the operating loan and make term loan payments?
  11. What will be the impact of my net worth if I donít have adequate crop insurance coverage?

FOR A NURSERY PRODUCER TO REVIEW/SHARE WITH A CROP INSURANCE AGENT:

  1. What insurance products are available in my county, including revenue insurance?
  2. How do Income Protection (IP) and Crop Revenue Coverage (CRC) compare to Multi-Peril Crop Insurance (MPCI) traditional insurance plans?
  3. How does IP and CRC coverage differ?
  4. Do you understand my marketing and financial plans?
  5. For my farm operation, what are the best insurance plans and coverages available?
  6. Should I consider crop- hail insurance?
  7. Should I consider insurance supplementals?
  8. What are the advantages of higher coverage levels (vs CAT)?
  9. What are the sales closing dates for crops in my operations?
  10. How do I prove/certify my yields?
  11. What is the final planting date(s)?
  12. What are my responsibilities now that I have signed an application for insurance?
    13. (e.g.: Acreage reporting dates, production reporting dates, notification of loss damage)
RISK MANAGEMENT CHECKLIST ñ Crop Insurance
How much crop insurance do you need?

You can improve your risk management performance simply by conducting an annual risk management checkup. Information included in the following risk management checklist may help in providing a list of questions to respond to regarding your nursery business situation.

Keep in mind also that there are many experts throughout the public and private sector who can visit with you about risk management strategies. These individuals may include commodity brokers, the extension service, nursery organizations, loan officer or an insurance agent.

Many are working hard to master new skills and learning how to identify new opportunities. The following questions and information should assist you toward asking your insurance agent and/or bank lender valuable questions -- and to act on what you learn.

Do I understand what the major risks are for my nursery crops and the likelihood of them occurring? List Risks:

1.________________________________________________________

2.________________________________________________________

3.________________________________________________________

4.________________________________________________________

( ) Are the plants I produce on the plant eligibility list?

( ) Do they have plants that are outside the required size?

( ) Are the plants I produce within the appropriate size containers?

( ) Do I have the proper winter storage onsite so I can obtain full coverage?

( ) Have I selected an adequate percent of insurance coverage on my portion of exposure?

What coverage level do I need? _______ percent

( ) Have I learned about all of the products that are available, including the Adjusted Gross Revenue insurance?

( ) Should I considered a stand-alone crop-hail or fire insurance plan?

( ) Have I worked closely with my lender and/or crop insurance agent to ensure they understand my marketing

and financial plans?

( ) Do I understand the important crop insurance deadlines and what is required of me for each?

Crop Insurance Deadlines:
Sales closing date - last day to apply for coverage.

Cancellation date - give notice if I donít want insurance next year.

Plant Inventory Reporting date - actual plant inventory must be provided by this date.

Payment due date - interest charges are due beyond this date.

Date to file notice of nursery crop damage - damage must be reported by this date.

End of insurance period - latest date of coverage for my insurance policy.

Debt termination date - insurance coverage for next year will be canceled if payment is not made

by this date.

( ) Have I identified and utilized reliable sources and contacts to obtain helpful management information?

SUMMARY ON PRODUCTION RISK
As can be seen throughout this illustration, managing production risk in nursery production does not necessarily involve avoiding risk, but instead, involves finding the best available combination of risk and return given a personís capacity to withstand a wide range of outcomes. Effective risk management involves anticipating outcomes and planning a strategy in advance given the likelihood and consequences of events, not just reacting to those events after they occur. That is, the four main aspects of risk management involve:

1. Identifying potentially risk events,
2. Anticipating the likelihood of possible outcomes and their consequences,

3. Taking actions to obtain a preferred combination of risk protection and expected return, and

4. Restoring (if necessary) the nursery businessí capacity to implement future risk planning strategies

when distress conditions have passed.

**For the full article on Managing Nursery Production Risks, go to http://www.agrisk.umn.edu/Library/Display.asp?Id=1535&F=1&P=Search&LIB=SP

Based on information from Managing Nursery Production Risks by Jo Lynne Seufer and the USDA/Risk Management Agency.
http://www.agrisk.umn.edu/Library/Display.asp?Id=1535&F=1&P=Search&LIB=SP